MSc Management

Assignment Cover Sheet

Submitted by: 0860091

Date Sent: 5th January, 2009

Module Title: Operations Management

Date/Year of Module: October 2008

Submission Deadline: 5th January, 2009

Number of Pages: 9

Word Count: 2483

Question: [Question Number and Title, or Description of Project]

“The iPhone’s Rise to Glory and Challenges ahead for the New Year: A
Supply Chain Perspective’

“All the work contained within is my own unaided effort and conforms to the
University's guidelines on plagiarism.”
An Introduction
The iPhone is one of the most innovative devices to come out of Apple’s bag of tricks.
It is essentially an MP3 player (interface based on the best selling iPod), an organizer,
a games console, a camera, and before I forget, a phone too [1]. It is no surprise then
that it has sold over 10 million units since it was introduced in the second quarter of
2007 [2]. It sold a massive 6,920,000 units in Q3 of 2008, making it 39% of Apple’s
business [2]. Its biggest accolade came in 2007 when it was named Time magazine’s
Invention of the Year [3].

iPhone and the Supply Chain

The iPhone has been successful no doubt due to its Apple’s innovative ability and
ground breaking interface, however a major reason for its success has been its
effective supply chain. As Michael Levi, director of i2 Technologies’ solutions
strategy comments, “A killer product is only successful if it gets to the right customer
at the right price at the right time,” and “Apple’s supply chain technology is the really
the silent contributor to the company's success in executing the product innovation”
[4]. Ten to fifteen years ago, Apple owned all of its processes (high vertical
integration) [4]. However after realizing the benefits of outsourcing and
specialization, and along with clever forecasting of demand, it currently implements a
well synchronized supply chain which has given it an edge over its competitors [4].
Their superior ability to forecast demand was evident when the iPhone was introduced
in June 2007. Many retailers thought that waiting in line for several hours to buy the
first iPhones to be rolled out would be worth it. Most of them adopted a ‘buy one,
keep one’ philosophy whereby they would keep one phone and sell the other at a high
profit, assuming that Apple would be unable to keep enough stock to serve all its
customers [5]. However, how wrong they were; Apple was able to match supply with
demand and the iPhone was virtually never out of stock [5]. This case is a clear
example of Apple established its superiority and a competitive edge through its
efficient supply chain.

Let us take a look at the supply chain which Apple has been using for production of
iPhones. (Figure 1)

As we can see, Apple heavily out sources its production processes all over the globe,
with around 60% of the supply chain being in Taiwan. The only part of the supply
chain Apple is concerned with is the design and software for the iPhone [12]. Let us
see in brief a summary of the role each supplier plays in the chain: (Figure 2)

A major part of the success of the iPhone is due to its supply chain. In fact it is so
good that AMR Research places it at the top spot of its annual AMR Supply Chain
Top 25 [13]. "With its introduction of the iPhone, Apple could have stumbled in
meeting demand or failed on quality. It did neither," says the AMR report [13]. This
success can be attributed to its choice of suppliers, all task specialists thereby making
Apple’s job easier. One quick glance at the list of Apple’s supply partners tells us a
very important fact; hardly any of the suppliers are known to the common consumer.
The exploitation of this fact has been the secret of the iPhone’s success. A recent
study by a team of researchers from the Sloan Foundation found that the so called

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‘producers’ can create value by transforming the innovations of others into product
that consumers find useful and usable [14]. That is exactly what Apple quickly
realized and reaped profits because the company understands what a global supply
chain can and cannot do [14]. By using the specialist competencies of small, unheard
of companies, particularly in Taiwan, Apple has produced one of the greatest
inventions of the last decade.

With such a large dependence on outsourcing, the supply chain is rather complex and
in the next year, Apple may not be able to manage a supply chain with so many
suppliers.

Figure 1 ( Source: ‘iPhone: Made In Shenzhen, Assembled by Foxconn’ [11])

As seen above, all the specialist component suppliers and manufacturers deliver their
product to the assembly plant Shenzhen, China. Since the proximity of a few Asian
countries (including China) is not very far, the lower distribution costs to them can be
passed on to the customer and solve some of the problems facing Apple which will be
discussed later.

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Figure 2 (Source: ‘iPhone: Who's the real manufacturer? (It isn't Apple)’ [18])

Problems Anticipated For The iPhone in 2009

The Recession
In 2009, iPhone production will no doubt be hit by the recessions all over the world.
Consumers across the globe are likely not to be spending much on gadgets of desire.
Apple did have a glorious 3rd quarter of 2008-09, with sales reaching a mammoth
6,920,200 units [2]. If anything, this performance would establish that Apple is doing
well and on their way to yet another quarter of phenomenal sales. However the
economic climate predicted for the next year would contradict that assumption. It can
be inferred from the recent estimates of GDP (worldwide) given by the IMF [19] that
consumption and demand for items will decrease and hence, the iPhone may not be as
profitable a product next year. Apart from a decreasing demand for the iPhone, Apple
will also face problems in its supply chain. Most of the iPhones parts are outsourced
to suppliers in USA, Singapore and Taiwan. The iPhone’s supply chain is complex
and will consist of suppliers and distributors in different tiers. With falling demand,
many suppliers may not be able to provide Apple with components as and when they
are ordered. These suppliers may in turn be getting raw materials from a 2nd tier
supplier. The 2nd tier supplier may reduce its capacity to save costs and hence lower
its production. In this case, the lowered production will affect the 1st tier supplier,
lowering its production by an even larger percentage. In turn, the effect will be felt by
Apple, who will ultimately end up with the biggest inefficiency in production. This
phenomenon is known as the Bullwhip effect where a small change in demand at
either end of the supply chain can cause a great disruption to the operation (assembly)
itself [6].
There is some research to suggest the fact that Apple is cutting its production for the
next quarter. Barclays Capital analyst Ben Reitzes has cut his estimate for iPhone
production in quarter one of 2009 from 6.2 million to 5 million units [7]. An analyst

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from UBS too comments “iPhone production and the associated supply chain may be
experiencing some incremental weakness due to concerns about end demand [8].”

Hacking the iPhone

Another niggling worry for Apple has been the unlocking of the iPhone. The iPhone
usually comes bundled with a fixed wireless carrier service, like AT & T in the USA
[9]. This essentially prevents the user from using the iPhone unless he/she uses the AT
& T network as well for mobile usage. This implementation is done by securing the
iPhone with a code not known to the end user. However, apparently it isn’t rocket
science to unlock the iPhones, rendering them free from the mobile service provided.
Once the phone is free to use for other service providers it can be used in any country
with virtually any provider’s SIM card. This results in a loss for Apple and the mobile
carrier involved. The unlocking is attractive for pirates who buy the phone in
countries like the USA where prices are cheap and then sell it to consumers in
countries like India for example, where the device is much more expensive, or is not
available at all. In 2007, one million iPhones, or 27% of those sold, have been adapted
to work on other networks, said Bernstein Research analyst Toni Sacconaghi [9].
Apple has also admitted the number of unlocked iPhones is significant [9]. Apple did
issue some warnings a year back saying that anyone attempting to unlock their iPhone
to use with an unauthorised mobile network could find their phones irreparably
damaged [10]. However in my opinion, these warnings mean nothing to consumers, as
applications like iTunes may not even have appeal to them; if they were unethical
enough to buy an unlocked phone, they’d probably be using pirated music and movies
on that phone too. Unlocked iPhones have become such a big industry that analysts
suggest that in the end quarter of 2008, Apple could have lost $500 million in
revenues as a result of a large percentage of phones being hacked for use on other
networks [9].

Fake iPhones
On researching and going through forums and blogs of consumers who did purchase
the iPhone I have observed many of them have done so online, with retailers claiming
that the phone is unlocked, ready to use with any Simcard and at a price much lesser
than that of the Apple Stores all over the world. Some of the counterfeit iPhones are
not exactly ‘fake’ as they actually produced by the same factories which produce for
Apple. The difference being these are additional “out the back door” unaccounted for
models which does violate the rights of the designer [11]. Also, reports of iPhones
being sold with software from other electronics companies like Sony have been
acknowledged [11].

What Can Apple Do?

I believe the answer to all the challenges posed to the iPhone in the times to come can
be resolved by changes in the supply chain. Let us analyze some options Apple could
explore to solve their problems:

Direct Retailing
Apple must introduce direct selling, through the internet to sustain its profitability. By
introducing a direct selling model, iPhone can move towards adopting a Customer

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Responsive Supply Chain, which is essentially a supply chain which is driven strictly
by customer demand for the product [17]. We can see that with direct retailing the
‘push-pull point’ of customer demand occurs before the product is customised, at the
fan out point [17]. However, currently with Apple, the customer pull takes place
significantly further upstream, quite a distance from the production plants [17]. Apple
pushes their iPhones through their supply chain, whereas with the new direct retailing
model they will be waiting for a demand pull through customer demand forecasting
[17]. It is to be noted by this model adoption, the push-pull point and the fan-out point
will shift to the point just before assembly. Let us take a look at this in Figure 3. This
model has certain benefits in that it will reduce inventory costs for Apple as products
are only produced on demand. This model can also be used to add customized add-ons
to the instrument which may be able to attract more customers. Moreover due to the
problem of diminishing suppliers and bottlenecks created (discussed above) the
customer responsive supply chain will minimize the bullwhip effect. Also, by shifting
to a direct retail model, retailers and distributors will be eliminated to some extent. By
doing this, the problem of hacking and unlocking the iPhone for unauthorized sale
elsewhere can be resolved to some extent. Most of the unauthorized hacking and
selling would be done by retailers who in turn know other retailers and share profits
on unauthorized sale, and so on. Also, the very code that is being hacked is known to
retailers and suppliers alike through communication through the supply chain. By
eliminating some retailer relationships, and letting the consumer get the product
directly unlocking incidents can certainly be reduced.

Figure 3 ( Source: Major et al, 2008, Supply Chain Management, The Case of Toshiba [17])

Vertical Integration

As seen above, most of the iPhone is actually produced by heavily outsourcing the
manufacturing process. However, in a recession, such a complex array of suppliers
can prove to be expensive and risky. The risk of defaulting suppliers is increased in
times of economic uncertainty. By outsourcing less, and using its own technical
expertise, Apple can minimize costs and the bullwhip effect by dealing with fewer
suppliers and vertically integrate their processes. This is not to say that a 100%
vertically integrated structure (like Apple was some decades ago) should be followed.
Apple can use their expertise on their other products like the Mac Book and iPod to

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produce some components on their own. We have already discussed the problem of
counterfeit iPhones circulating in the black market. By outsourcing extensively, I
believe that a bit too much of knowledge is being shared by Apple. Most of the
suppliers also supply to competitors and other hi-tech gadget manufacturers. This
shared knowledge in my opinion is a major cause of counterfeiting done by suppliers
themselves. By achieving a good balance of vertical integration and outsourcing,
Apple may be able to tackle the above mentioned problems.

Low-cost retailers
Apple will need to realize that demand for a product like the iPhone will fall
drastically with the onset of a recession in many countries. However, some industries
will benefit immensely from a recession. For example low-cost retailers will be
getting more customers than usual in this period of time. Reports suggest that Apple
has realized that low cost retailers can be used strategically, and has tied up with Wal-
Mart in the USA to distribute the iPhone in their outlets post Christmas [15]. By doing
so Apple will be adding an important distribution channel and targeting a new
audience which could be equally profitable for them provided the pricing is revised.

Subsidized iPhones for Asia

In order to make even more money, the iPhone needs to go global but must be
affordable to make sales in other countries [16]. As discussed above, the iPhone is
assembled in Shenzhen, China. It is quite clear then that the cost of distribution within
China and neighbouring countries will not be high. This is why the rumour that China
Mobile Ltd. subsidizing the Apple Inc. the iPhone makes sense [16]. Due to the threat
of back door products being built by the suppliers themselves, reducing prices in
China and Asian countries in particular could prove beneficial and also fair in terms
of price equality all over the globe. The threat of unlocked phones could also be
minimized if prices were relatively similar in Asia. Consumers would much prefer
authentic, brand new products to hacked in instruments.

Conclusion
As discussed above, despite the highly efficient supply chain which Apple is currently
implementing for the iPhone, there are some major problems facing the company in
the midst of economic turmoil. The location of the iPhones manufacturing and
assembly plants (predominantly Taiwan and China) makes it vulnerable to threats like
unauthorized unlocking, counterfeiting and of course the onset of recession.
Fortunately for Apple however, just as the problems lie in the domain of its supply
chain, so do the answers. Some major changes in the supply chain need to be
implemented like a change of retailers, vertical integration and a rethink of pricing of
the iPhone in countries where it is being produced. Apple has realized the need for a
change by partnering with retailers like Wal-Mart and will hopefully be able to come
out of the recession as profitable as it is now.

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References
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from http://www.apple.com/iphone/features/
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17. Major et al, December 2008, Supply Chain Management, The Case of Toshiba

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 18. Texyt Staff, June 2007, iPhone: Who's the real manufacturer? (It isn't Apple),
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